Binding material charges in cane price are treated as part of purchase price, with no mandatory deduction under the control order.

Clause 3A of the Sugarcane (Control) Order, 1966 is described as permissive: it authorises the competent authority to allow a suitable rebate, so deduction towards binding material is treated as directory rather than mandatory. Binding material charges paid as part of cane price are treated as part of the commercial purchase price, not a separate diversion of profit. The note also states that Section 40A(2) of the Income-tax Act, 1961 does not apply to a co-operative society. Payments to non-members were likewise said to be unsustainable for disallowance where the assessee paid the State Advised Price and no binding material deduction was mandated from that price.

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Issues: Whether disallowance of the binding material charges paid as part of cane price was sustainable under the Sugarcane (Control) Order, 1966 and under the Income-tax Act, 1961.

Analysis: Clause 3A of the Sugarcane (Control) Order, 1966 used permissive language and empowered the competent authority to allow a suitable rebate, which showed that deduction towards binding material was directory and not mandatory. No direction had been issued requiring the assessee to deduct 0.01% in every case. The amount paid was part of cane price fixed in the commercial arrangement and not a separate diversion of profit. The addition made in respect of payments to members could not be sustained under Section 40A(2) of the Income-tax Act, 1961 because that provision was not applicable to a co-operative society. The addition relating to payments to non-members also failed, since the assessee had paid according to the State Advised Price and no deduction of binding material was mandated from that price.

Conclusion: The disallowance of binding material charges was not sustainable, and the issue was decided in favour of the assessee.

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